This post is addressed to all the proponents of net neutrality on the grounds of the freedom of choice of the consumer. But net neutrality has nothing to do with freedom.

The principle of net neutrality is that internet service providers should treat all content equally so that the consumers choice of content is not influenced by the speed at which that content is available.

Let me rephrase that principle without changing its meaning. Internet service providers should not be allowed to contract with content providers on mutually beneficial terms with regards to the speed at which the content will be made available to consumers.

Rephrased like this, it is clear that the principle is not about protecting the freedom of the consumer but about restricting the freedom of the service or content providers to spend their money as they see fit.

Proponents of net neutrality claim that its violation will make it more difficult for startups to compete with bigger companies because they do not have the money to pay the service providers for preferential treatment. That is true. All of the following is true too.

Startups do not have the money to pay great salaries. So how about pay package neutrality? Companies should not be allowed to pay more to attract employees because higher salaries influence the choices of employees.

Startups do not have the money to buy large offices. So how about office size neutrality? Companies should not be allowed to have more spacious offices because spacious offices influence the choices of employees and even of clients.

Startups do not have the money to purchase expensive routers and server farms. So how about infrastructure neutrality? Companies should not be allowed to have redundant server capacity.

Startups do not have the money to purchase advertisements on television. So how about air-time neutrality? Companies should not be allowed to spend more than a certain amount on advertisements.

Startups do not have the money for expensive quality control. So how about quality neutrality? Companies should not be allowed to spend more that a certain part of their budget on testing.

All of these absurd examples indicate the absurdity of the principle of net neutrality. The internet is nothing more than servers, routers, cables, spectrum rights etc. All of these are privately owned and privately maintained. Decisions on the use of these resources rightfully belong to the owners of these resources. That is what freedom means.

Like all violations of freedom, the principle of net neutrality hurts the profitability and efficiency of the most successful producers. And that hurts all of us.

Like this:

Over the past three days, I attended a workshop on GPU programming and applications at IIT Bombay by NVIDIA. Here are a few comments by different speakers, that stayed with me. And prompted me to write about a topic I have got tired of writing about.

1) “If the government had not invested in super-computing in the 90s we would not have mobile phones today.”

2) “The prime minister recently announced an outlay of Rs 45,000 crores for developing supercomputers. This is what all of us are excited about”

3) “Gone are the days when hardware was designed to solve important algorithms. Today, we have to adapt our algorithms to suit available hardware.”

The last comment refers to the fact that GPUs were developed to satisfy the enormous demands of the gaming industry. They are now being used for solving scientific problems, and algorithms have to be adapted or designed to utilize the enormous capabilities that GPUs can provide.

It seems plausible that some of the complex problems being researched would remain unsolved if the government did not fund them. But, is it true?

The history of GPUs indicates otherwise. GPUs were funded by the desire of people to entertain themselves. By consumers who have no knowledge whatsoever of the problems researchers are trying to solve, no knowledge of the technical hurdles they face, and perhaps no ability to even comprehend these problems.

10 years back when I was doing a project that required some graphics programming, I was struck by the enormous amount of computing and programming effort involved in producing realistic rendering of scenes. And I wondered about the guys who toiled to build games that had not just realistic rendering but so much more (modelling collisions, deformations, haptic feedback, simulation of human behavior …). I wondered where they got the motivation to toil away just to satisfy some silly gamer who wanted to see blood spurting out of a bullet wound in a realistic manner in some 1st person shooter game. The computational and modelling was challenging and interesting. But to what end? I couldn’t have done that.

The point is that it doesn’t matter. The technology that is useful to model fake blood spurting out of a fake bullet wound is also useful to simulate the impact of waves generated by a storm surge or a tsunami. And the amazing thing about the free market is that the idiot gamer who spends much of his life shooting imagined enemies on the biggest and most expensive devices money can buy, is contributing to the research efforts of all the speakers who presented their work in the last three days. And the idiot gamer is spending his money voluntarily to enrich (or waste?!) his own life. It is not necessary to tax him or the luxury products he buys to fund research projects.

Proponents of government funding often make the argument that it is necessary to invest in activities that are not economically viable in the short term to get returns in the long term. And yet, ask any of the eminent speakers if they would have invested government money in GPU technology 20 years ago. The answer is probably obvious. The fact is that none of us is good at predicting what the future will hold, what direction technology will take, what will work, and what will not. And none of us has the right to take other people’s money for what we think are more worthy projects. I might choose to think of hard core gamers as idiots, but that judgement does not give me the right to take their money and spend it on earthquake modelling. Those of us who are passionate about scientific projects have as little conception of the joy that gamers derive from their games, as the gamer might have of the joy that we derive in formulating and solving differential equations. It is not for us to decide what activities other people should value. And we should stop making the case for robbing other people of their money to meet our goals – even if we do think our goals to be bigger and worthier that those of the people we propose to rob.

And if the moral argument is not sufficient, the history of GPUs should be a humbling reminder. The money we propose to spend on our pet projects could have been spent by others in other ways – on their pet projects. Are we confident that our pet projects will do more for the future of technology (whatever that means), than their pet projects? And if we are not, we should have the good sense to let the decision remain in the hands of the people who earned that money in the first place.

Like this:

Allegedly, the public exchequer has incurred a loss of several tens of thousands of crores of potential income from auctions on the 2G spectrum. And the controversy over this refuses to die down. No one seems to realize that the government does not own spectrum and has no rights to auction it in the first place. Most people seem to believe that the government owns everything by default. So let me play along and see where this logic leads.

To setup a shop (or pretty much anything) in India, one needs to acquire a license (or registration or whatever). As far as I know, these licenses have never been auctioned. Assuming a very modest figure of Rs 1 lac per shop license auctioned, and just half a million shops who could have paid this modest sum, that works out to a loss of 5000 crores.

Over 750,000 two wheelers were sold in India last year. Each of those had to be registered. These registrations could have been limited (with the added benefit of reducing road congestion and pollution) – say to 500,000 – and auctioned to raise revenue. Assuming a modest amount of an extra Rs 10000 per registration, that works out to a loss of 500 crores. Similar losses could be worked out for sales of other vehicles. Let us say the total loss on all vehicles is 2000 crores. Further the government could have made it mandatory to renew vehicle registrations every year (as a security measure). These renewals could also be auctioned (to reduce the incentive to keep using old vehicles, thus reducing pollution). Assuming a very small amount of Rs 1000 on average per vehicle registration and estimating the number of vehicle owners who would pay this amount at 20 million, the total loss works out to another 2000 crores.

The cricket world cup is coming up. The right to use cricket as a theme for advertisements could be restricted and auctioned. Just imagine the loss! Easily another few thousand crores.

Tens of thousands of people migrate into cities from rural areas or smaller cities and towns. Since these people obviously cannot afford to buy houses, they stay on rent (if not in illegal slums). The right to rent space could be auctioned (with the added benefit of reducing overcrowding of the cities). Another few thousand crores lost.

Enough of examples. Let me generalize. Any activity that results in any value to anyone could be restricted by the government and the rights to it could be auctioned, thus generating additional revenues. Assuming just 1% of GDP as the revenue that the government could have generated by auctioning rights to economic activity, that amounts to a loss of 70,000 crores per year. Aren’t auctions wonderful? They have such immense potential to generate revenue. Sadly, this incredible idea is woefully under-used by policy makers. And no one is complaining about this scam!

Enough of sarcasm! Suppose the license rights had been auctioned. Who would have paid the money? The telecom companies who would have had to remain in business by lowering their costs – paying lower salaries to their staff or by hiring less, increasing the prices for their services and by reducing their profits. Ultimately, it is the “common man” – that mythical creature worshipped by all policy makers – who would have paid for the license rights. And where would the money have gone? Ah it would have gone to the same place where government money usually goes – but really, that is rude of me. I should not dare to ask such questions. Of course it would have gone into welfare schemes for the common man – the NREGA (remember the pictures of smiling villagers carrying a couple kgs of mud on their heads?), the minimum support price for various foodgrains (wasn’t there a recent report about grains rotting in government godowns? never mind), the public distribution system (absolutely necessary since minimum support prices cause inflation), the right to be educated (in a school where teachers never turn up, but that’s OK, the children can atleast have fun) etc. These are all noble ideas with proven track records. They must be implemented at all costs. You see, the “common man” is too stupid to know what he should do with his own money. That money should be taken away from him – by means of taxes on all consumption, license fees on every service that he uses etc, etc. A portion of it should be used to subsidize higher education (after all, the bureaucrats and policy makers need to be educated, don’t they?). Another portion should be used to establish various government agencies (like the agency which calculated the loss to the exchequer in the 2G scam). Another portion should be used to fund events such as the Commonwealth Games (it is a matter of national prestige after all). Another portion should be allocated to muncipal agencies and the like (like the one that digs up the road in front of my house every 3 weeks). Another portion should be used to line the pockets of the entire government machinery (people are corrupt and selfish, what to do?). Another portion should be used to create TV and other media advertisements for welfare schemes. And then, whatever is left (if any) may be returned back to the common man who should be grateful and beholden to the government for thinking of his welfare. Where would he be if he were left to the mercies of the free market? Oh no. That is just unimaginable. He would simply be exploited by the capitalists and left without a home, education and health care if he had full control over all his money. Just imagine!

Oh, did I get back to sarcasm after starting the last para with “Enough of sarcasm!”. Sorry about that. The real scam here is much, much larger than a few thousand crores. It has been in operation for decades (centuries?). And it is primarily a moral scam, not a monetary one. It is perpetuated by people who seek to derive their self esteem second hand – not from their personal achievements but from a claim to altruism (however tenuous), not from producing value but from distributing the value they have not produced. People like Raja are not responsible for the scam. People who support the system that makes Raja inevitable are.

Like this:

My last post on Social Planning did not address the issue of externalities as well as I would have liked so I decided to write some more on it.

For the first part of the arguement, consider the example of a lighthouse from George Reisman’s book Capitalism: A Treatise on Economics (pdf version available here. Note: I have not read it fully). A lighthouse benefits all the ships that use its light whether their owners have paid for the construction and maintenance of the lighthouse or not. So there is no immediate incentive for any individual shipowner to pay. In such cases, it is claimed that lighthouses will be under produced. Reisman writes that ship owners could make their payments contingent on the payment of a sufficient number of other ship owners’ payments thus creating an incentive for everyone who wants a lighthouse to pay for it. These kinds of solutions do not figure in economic models based on the assumption that individuals act to maximize their utility, with no consideration for what effect their acts have in a wider context. This is simply not true. How would such a model explain the existence of this blog, activist groups, charities etc? Man is not homo-economicus. He is capable of a wider understanding of the world. Stripped of all the mathematics, the externalities arguement is essentially a claim that men are too short-sighted to act for their long term good. It is ironic that proponents of social planning use economic models based on short-sighted decision making to “prove” that the free market must fail and then use this “proof” to argue that people should elect a government which will magically not be hampered by short-sightedness. How do the votes of millions of short-sighted men result in an elite group that is not short-sighted? The fact is that governments voted into power by short-sighted men are far more short-sighted than any of the voters. Witness the incredible spending sprees that governments around the world are indulging in, with no thought of who, when and how will create the goods to support all the extra money being created and what will happen to the economy when the money is finally presented for consumption. Witness the fact that the liabilities of all social support programmes keep on increasing.

Secondly, as I mentioned briefly in my previous post, the solution suggested by the proponents of social planning – taxing/subsidizing – necessarily violates the property rights of individuals. Once the government has the power to violate property rights, a different kind of “externality” sets in. Henry Hazlitt describes the process

Special interests, as the history of tariffs reminds us, can think of the most ingenious reasons why they should be the objects of special solicitude. Their spokesmen present a plan in their favor; and it seems at first so absurd that disinterested writers do not trouble to expose it. But the special interests keep on insisting on the scheme. Its enactment would make so much difference to their own immediate welfare that they can afford to hire trained economists and public relations experts to propagate it in their behalf. The public hears the argument so often repeated, and accompanied by such a wealth of imposing statistics, charts, curves and pie-slices, that it is soon taken in. When at last disinterested writers recognize that the danger of the scheme’s enactment is real, they are usually too late. They cannot in a few weeks acquaint themselves with the subject as thoroughly as the hired brains who have been devoting their full time to it for years; they are accused of being uninformed, and they have the air of men who presume to dispute axioms.

Each time such a project gets through, it establishes a further precedent for the violation of rights. This leads to ever increasing government interference until government becomes nothing more than an unstable coalition of special interest groups. The proposed cure for economic “externalities” ends up creating a political “externality”.

In a response to a forwarded post, a friend made the following argument (I am putting only its essence and in my own words, since I have not taken permission to make it public)

Market forces can produce outcomes that are worse off for everyone in the system. A social planner can, (in some cases at least) improve on the efficiency of the market. Pigouvian tax is an example.

In his response, he acknowledges that it might be difficult in practice for the social planner to obtain all the information required, but says that it would be very surprising if the social planners actions could never lead to efficiency improvement.

Consider the crux of the argument (emphasized above). There are three aspects to it that should be considered.

1) What are market forces? They are an abstraction that refers to all the judgements made by individuals interacting with each other under some conditions. If one is talking of a free market, these conditions are the absence of any coercion. Note that for the concept of coercion to be clear, a system of property rights (at the very least) needs to be in place (More on this in 3). If one is to prove the statement above (in a mathematical sense, which is what my friend meant), these market forces need to be modeled. This leads to 2.

2) How are choices evaluated? In actuality, every individual evaluates and weighs choices in a unique manner depending on the context of his knowledge, his hierarchy of values etc. This evaluation is neither necessarily rational nor quantitative. Yet if a mathematical result is to be obtained, both the evaluations and the decisions based on these evaluations need to be quantified. The evaluation (sometimes called “utility”) is quantified by assigning a monetary value to every “variable”. The decision making process is quantified by assuming that each individual acts to maximize utility (the sum of the monetary values of the results of all his choices).

3) What is the system? In actuality, the system is the set of laws that determine the kind of interactions that occur among individuals. In the model, this translates to assumptions that certain factors will remain constant over time.

Once these three aspects are modeled, one ends up with a set of equations that can be solved to determine what utility each individual will be able to achieve. The solution represents an outcome. In certain cases, feasible outcomes may exist that are better for each individual. (This usually happens when there are “externalities” which can be considered mathematically as non-linear effects). The most obvious problem with this argument is that it involves a huge number of variables, so man variables that no human (or computer) can solve the set of equations in any meaningful time. That however, is not my argument. My friend already acknowledges this fact and claims (plausibly) that in certain cases, a social planner may find an approximate solution that is still better than the free market one. My arguement is that: The fact that a (mathematically) feasible better solution exists, does not mean that it is possible to achieve in actuality. The reason is that the sort of actions required to achieve the feasible solution change the system (point 3) that was analyzed. In actual terms, such actions necessarily involve violating the property rights of individuals, thus changing the interactions between people, the monetary values they attach to different choices and the strategies they adopt to maximize their values. In plain language, attempts to achieve the “optimum” solution are lost in a host of unintended consequences. The information that says a better solution is feasible exists not with any single individual but with a vast number of individuals. To put that information to use, even if a social planner is able to approximate it, he needs to communicate it to all the people who will need to act on it. But force (and social planning is all about force) is a very destructive way of communicating. Successful communication is done with persuation and persuation is what the free market is all about.

Now consider a much simpler moral argument. Every value that man achieves is a result of using his mind. And the essential requirement for the mind to work is freedom. When man is free to act as his mind instructs him to do and is responsible for the consequences of his actions, his mind works the best. When he is forced to act against the judgement of his mind, his mind becomes passive and he loses the motivation to use his mind (something that never figures in a mathematical model). In the most fundamental sense of the word good, force can never be good for man.

In his response, following my post on propaganda, my friend clarified that what he meant by propaganda was a one-sided presentation of an idea that does not consider all sides of an issue. The moral idea (in the paragraph above) when supplemented with the practical arguments and all the evidence of the past century becomes a fundamental political principle. And there is no other side to the issue left. As I wrote in this post, as long as one is unsure of something and has not integrated ideas into principles, it is good to be circumspect and consider all pros/cons of all sides of an issue. But on issues on which it is possible to have relevant principles, there is only one side. Fundamental principles do not allow any evaluation in shades of gray. Whether I should be free to act on my own judgement or whether I should allow a social planner to force his whims on me or whether I should become a social planner myself is not an issue where I will weigh the pros/cons of the alternatives.

Finally for the sake of completeness, consider the Pigouvian tax/subsidy to correct for externalities. The first point to be noted is that most externalities go away when property rights are properly defined and implemented. And in fact a tax on pollution is actually quite close to what a property-rights solution to the “problem” of pollution would be. As for the subsidy on education, one can just look at the state of subsidised public education in the U.S. to see how it works. Externalities cause problems in model-based economics because they are non linear effects and most models are linear (eg, price = marginal utility) (for the simple reason that non-linear models are untractable). Man’s mind is not a linear device however, and a linear model does it no justice. Just think of the salesman who negotiates a price (= marginal utility?) or the investor who depends on a virtuous cycle where increase in supply creates a non-existant demand to recover his investment.

I recently found the time to read Henry Hazlitt’s book “Economics in One Lesson” (available online here). The book conclusively demonstrates that any attempts to coerce the free market can only result in the short term gains of special interest groups at the expense of everyone else and that even these short term gains are more than canceled out in the long term. The value to me in taking the time to read it was not in learning anything particularly new but in knowing that a detailed and very well-written explanation of a number of statist ideas exists in one place. Hazlitt writes that all statist fallacies essentially consist of considering only the immediate and visible consequences of a particular policy while ignoring the secondary and not-easily-visible consequences – an idea that was expressed by Bastiat long ago in 1850.

More than the book itself, what is interesting to me is the fact that the fallacies in statist ideas have been exposed long ago (Hazlitt’s book was published in 1946 and Hazlitt himself takes no credit for being original) and yet these ideas continue to be widespread among the general public as well as among trained economists and policy-makers. In fact, the financial crisis we are seeing at the moment is the inevitable result of some of these same fallacies (more on that in future posts) and the alleged cure is more of the same. The inescapable question then is: Are statist ideas really fallacies or mere rationalizations? Are they really held out of genuine ignorance and/or confusion or is there some other explanation? Hazlitt seems to think that they are genuine fallacies caused by the fact that the immediate consequences of interventionist and coercive policies are all too obvious while the secondary and long term consequences are not so obvious. I think that is a far too charitable view. It is inconceivable to me that simple arguments cannot be grasped by trained economists or intelligent laymen. Hazlitt also mentions how the paid spokesmen of special interest groups are able to drive out “dis-interested” writers simply because of their dis-interest (a mechanism also discussed by Zakaria in his book The Future of Freedom). While this is certainly part of the reason why special interest groups can control the government, it does not explain the support for statist ideas among the dis-interested public.

As an example, a few days back, I had a long and futile argument with some colleagues about the ineffectiveness of statist policies. Now these colleagues are certainly intelligent enough to grasp the fallacies inherent in statist ideas. Moreover they have no reason to support such ideas for any special interest. Yet they continue to defend them. And inspite of any concessions they may have made during the argument, I am sure that the same points will come up in the next argument. As one of them put it, (paraphrasing) “I am not opposed to capitalism, but I am a socialist at heart.” To me, that is the source of the persistence of these fallacies. Altruism is totally incompatible with the working of the free market. But as long as it is accepted, no amount of rational argument (such as the ones in Hazlitt’s book) can genuinely convince a person that collectivist and socialist ideas always achieve the opposite of their stated purposes.

Hazlitt shows how raising prices of a particular product (whether by tarrifs or other methods) to create employment penalizes all the consumers of that product (the public interest?), how lowering prices of a particular product drives out all the marginal producers (the disempowered?) and also creates shortages so that only those with more purchasing power can afford the product, how minimum wages cause unemployment by preventing people whose services are worth less than the minimum wage from being employed at all (the most needy?), how rent controls raise the rents in new buildings enormously (housing for the poor?) while simultaneously removing all incentive for (or even ability to) improve/repair existing buildings, how inflation – necessitated by deficit spending to fund all the welfare programs – essentially acts as a tax whose impact is felt highest by the poor etc, etc, etc… not to mention that all these measures also reduce the total product of the economy (the public interest?)

But the point is that the cure suggested by all these fallacies – regardless of any evidence – the free market, where every individual is free to pursue his own interests and is not legally responsible for the “welfare” of others is morally unacceptable to the altruists, and no amount of merely economic arguments can change that.

Today, we live in a mixed economy made up of both semi-free markets and government controls. We live in a culture that views business and businessmen as a necessary evil. While the ability of capitalism to bring general prosperity is begrudgingly acknowledged, big business and naked “greed” are routinely blamed for the country’s problems. Calls continue for more government controls and regulations to fix a “broken” system. We think this view is flawed.

When it becomes difficult to determine which effects are due to government interference and which are due to free market influences, our goal is clarity and proper identification. When we hear calls for pragmatism and “balance” in our approach, our goal is to find the principles that illuminate the proper course of action. When we see a system of political pull and coercive government replacing a system of merit, productivity and voluntary trade, our goal is to defend the individual rights that make the latter possible once again.

Among its contributors are two bloggers I have regularly followed for some time

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Quotes

Don't worry about changing the politicians. The politicians will wear their fingers to the bone sticking them in the air to test which way the wind is blowing. Instead, work on changing the wind. If you change the wind, the politicians will follow.
Richard Ralston, AFCM